Starbucks, Dunkin’ Brands, and Nestle Could Get Jolt With New Customers

Coffee is a $175 billion industry and the second largest beverage category in America—trailing only water, according to analysts at Guggenheim.

How’s the industry brewing right now? The team at Guggenheim broke it down in a 78-page report. Here are some key takeaways.

How big is the coffee category?

The size was noted above and the category is dominated by
Nestle
(ticker: NESN.Switzerland),
Starbucks
(SBUX), and JAB Holdings, which owns Caribou Coffee, Peets Coffee and others. The team at Guggenheim estimates U.S. sales are about $80 billion a year.

Of that figure, $70 billion comes from out-of-home sellers like coffee shops. “That is driving new consumption occasions and more premium experiences,” the team wrote.

They estimate 91% of coffee consumers drink it daily, which is nearly 30% more than soda drinkers, at 62%. One key area for improvement they note is that 68% of non-drinkers don’t like the taste, while 14% are concerned about “negative health effects.”

Major players including
Keurig Dr Pepper
(KDP), Nestle’s Nespresso, Dunkin Brands Group (DNKN), and Starbucks “are all failing to communicate the healthiness of their brand based on social conversation,” they wrote. “Craft players like Four Sigmatic and Bulletproof have made health their central selling point, creating products such as mushroom-based coffee or collagen and MCT oil-infused coffee.”

If companies can “leverage science for existing brands or create new health-centric businesses,” they may be able to convert such naysayers.

Starbucks is the queen of coffee.

The Guggenheim team called Starbucks a “key competitive advantage” for companies that are looking to outgrow the rest of the category. Starbucks has “leadership in consumer conversations online, coffee shops, pods, ready-to-drink, and premium roast & ground,” they wrote.

Though
PepsiCo
(PEP) and Keurig Dr Pepper have rights to Starbucks in ready-to-drink and pods, respectively, Nestle is the global owner of packaged coffee rights.

“Importantly, Starbucks over-indexes in cold brew and iced coffee, both of which we see as the most attractive sub-segments to attract younger consumers,” they noted.

Nespresso could take on Keurig.

Nestle’s Nespresso device is a sort of luxury coffee and espresso alternative to Keurig that uses its own pods.

“Nespresso offers a wide range of capsules with more premium options such as cappuccino and lattes,” they noted. “While the machine is more expensive than a traditional Keurig, younger consumers are becoming increasingly likely to buy a Nespresso machine.”

Nestle also has the license for Starbucks-brand packaged coffee, though it says it will continue selling Keurig options. Starbucks K-Cups were the leading brand on the Keurig system in the most recent quarter, Guggenheim noted, outpacing the rest of the category two-fold.

For Keurig Dr. Pepper, having its global leading rival that big in its system “is quite unusual, to say the least, and is presenting some risks that could negatively impact Keurig’s core business in two ways, especially because ... the Nespresso platform is becoming more attractive to U.S. consumers,” they noted.

“While Keurig is still the dominant single-serve platform, Nespresso’s relevance is increasing in social media conversations, online search is outpacing Keurig, and Nespresso over-indexes versus Keurig in consumer responses on many attributes (e.g., quality, variety, durability),” they added.

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